Warm relations between China and the Gulf Arab countries

04/11/2007 / Associated Press Newswires
Jim Krane and Christopher Bodeen

Warm relations between China and the Gulf Arab countries
DOHA, Qatar - Look closely at some of the major development projects in China, and what you see behind them is Middle East oil

Warm relations between China and the Gulf Arab countries
DOHA, Qatar - Look closely at some of the major development projects in China, and what you see behind them is Middle East oil.

A $500 million port development in Tianjin is funded by Dubai-based DP World. A $5 billion refinery in Guangdong province will be built by Kuwait. A huge crude oil tank farm on Hainan Island is planned by Saudi Arabia.

These projects and others have come out of the Middle East's growing economic relationship with China, which has become a major buyer of energy from the countries doing the investing. In turn, China -- the world's second-largest oil consumer after the U.S. -- is boosting its investments in the Middle East to lock in a steady stream of oil and gas.

"This is the beginning of a long-term trend of investors from the Gulf region investing in the Far East," said Michael Philipp, chief executive of Credit Suisse Europe, Middle East and Africa, during a CEO conference in Doha in February. "The flows are tremendous. The interest is tremendous. This will continue to grow."

The strengthening Middle East-China bond comes amid a strain in U.S.-Arab relations since the Sept. 11 attacks. When Saudi King Abdullah made his first overseas trip in January 2006 after taking the throne, he skipped America and flew to China. Chinese President Hu Jintao soon returned the honor and later visited neighboring Dubai.

Trade between the six Gulf states and Asia doubled between 2000 and 2005, reaching $240 billion, according to figures released at the CEO conference.

Gulf investments in China totaled around $20 billion last year, bankers handling the deals said. Those investments look set to grow dramatically, especially if high oil prices continue to fill Gulf treasuries.

The six Gulf Arab countries -- Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman and Bahrain -- will invest nearly $250 billion in Asian markets including China over the next five years, according to a January speech by Omar bin Sulaiman, governor of the Dubai International Financial Center.

Cash-flush Gulf investors are drawn to China's red-hot markets, where returns have outpaced those in the United States and Europe. They are also more reluctant to invest in the United States after the U.S. Congress voted to force a Dubai-based company to sell its ownership of American port operations a year ago.

"If you can't go to the United States, you have to go somewhere else," said Beshr Bakheet, a Saudi investment adviser. "People want to do business and (U.S. authorities) are making their lives difficult."

Within a decade, China and India are likely to surpass the United States and Europe as the largest Gulf investment destinations, said N. Janardhan of the Gulf Research Center in Dubai, a private think-tank.

Economists say deepening Gulf preferences for Asia could eventually affect the U.S. economy or the value of the dollar, but have not yet. Nor is there much concrete evidence that Gulf investors have yet slowed their purchases of the U.S. assets they traditionally favored.

A survey last year by consultancy McKinsey says Gulf investors will shift their portfolio allocations toward Asian assets by 10 to 30 percent, which "represents an important change in the pattern of global capital flow."

The surge in funds can be seen in several areas:

-- United Nations statistics show the six Gulf countries had no major investments in new company facilities in China in 2002. By 2006 they had 13, seven of which were bankrolled in the United Arab Emirates.

-- When the Industrial & Commercial Bank of China launched its $22 billion public offering in October, Gulf investors snapped up as much as 20 percent of the shares, Philipp of Credit Suisse said. Saudi Prince Alwaleed bin Talal, the world's fifth-richest man, bought $2 billion in shares.

-- Kuwait and Saudi companies are building refineries in China. Saudi Arabia is helping build a huge storage facility in China to hold a 30-day emergency oil supply. Dubai firms operate Chinese ports and are developing residential and commercial complexes in Beijing and Shanghai.

-- Chinese firms are building an extension of the Tehran metro in Iran, putting up a shipbuilding complex and negotiating three enormous oil and natural gas production deals, one valued at $16 billion.

-- State-owned Kuwait Investment Authority decided in 2005 to boost the Asian assets in its $100 billion portfolio from 10 to 20 percent.

-- Dubai's enormous Dragon Mart shopping mall and residential complex is the largest trading hub for Chinese wholesalers outside mainland China.

-- China's builders, engineers, labor suppliers and equipment companies have begun winning shares in the $1 trillion in projects planned or under way in the Gulf.

The economic ties have political implications.

For now, Gulf countries show no signs of wanting to get rid of the U.S. security that protects them, but they do want to diversify. Leaders here are angered by the invasion of Iraq, and they worry that the hard-line U.S. policy toward Tehran could provoke an unwanted war. They want China to take a role maintaining stability in the region.

Saudi Foreign Minister Prince Saud Al-Faisal said in 2004 that Saudi Arabia would reduce its dependence on U.S.-dominated security arrangements. And in January, a delegation from a Shanghai political think tank was told in Dubai that a bigger Chinese role in the Gulf would be welcomed, especially if Beijing backed Arab positions in the U.N. Security Council.

China appointed a special envoy for Mideast affairs in 2002 and hosted visits from Palestinian foreign minister and Hamas member Mahmoud Zahar last year.

"China's envoy hasn't been too effective so far," said Shen Dingli, dean of the Institute of International Studies at Fudan University in Shanghai. "But it's a sign that China is getting more involved."